ERC Changes Unveiled: The Long-Awaited IRS Update

The Employee Retention Credit (ERC) has been a hot topic in the salon industry since its inception during the COVID-19 pandemic. As salon owners continue to navigate the complexities of this tax credit, the IRS has recently announced significant updates to its processing and payment procedures after a nearly one-year moratorium on claims filed since September 13, 2023. These changes could have important implications for salon businesses that have claimed or are considering claiming the ERC.

Before diving into the latest updates, let's briefly recap the ERC and why it matters to salon owners. The Employee Retention Credit was introduced as part of the CARES Act in 2020 to encourage businesses to keep employees on their payroll during the pandemic. This credit, worth up to $26,000 per employee, offered a potential lifeline for many salon owners who faced mandatory full or partial suspensions, started during the pandemic, or significant revenue declines.

Latest IRS Announcements

On August 8, 2024, the IRS released new information regarding ERC. The key points salon owners should be aware of are:

1. Accelerated Processing: The IRS is moving to process 50,000 low-risk ERC claims quickly.

2. Payment Timeline: Payments for these claims are expected to begin in September, with additional payments continuing in subsequent weeks.

3. Expanded Claim Review: Beginning next month, the IRS will start processing some claims filed between September 14, 2023, and January 31, 2024. The IRS will continue processing claims submitted before September 14, 2023.

What This Means for Salon Owners

Given these updates, here are some steps salon owners should consider:

1. Monitor Your Claim Status: If you've submitted an ERC claim on or before January 31, 2024, September is a good time to start checking its status. However, it is essential to note that only approximately 50,000 returns are anticipated to be processed in September, so, it may take longer.  You can do this by contacting the IRS or the tax professional who assisted with your claim. Be prepared for potential delays and plan your finances accordingly.

2. Prepare for Potential Payment: If you believe your claim might be in the low-risk category, start planning how to use the funds if they arrive in the coming months.

3. Prepare to Amend Your Income Tax Returns: Under the IRS guidance, the business must amend its income tax return to remove the corresponding wage deduction for any amounts of ERC received. Engage with a tax preparer who can assist you in amending the necessary income tax return(s).

4. Review Your Documentation: Even if your claim is approved and paid, the IRS may still audit ERC claims in the future. Ensure all your documentation supporting your claim is organized and easily accessible. If there are doubts about the credibility of the preparer you worked with, consider obtaining a second opinion on your ERC filings.

5. Stay Informed: The IRS has indicated this process is ongoing. Stay informed about any further updates or changes to the ERC program.

The Importance of Compliance

While the IRS announcement focused on processing and paying claims, it's crucial to remember the importance of compliance. The ERC has been scrutinized due to concerns about improper claims, often fueled by aggressive marketing from third-party "ERC mills."

As a salon owner, ensuring that any ERC claim you've made or are considering is legitimate and well-documented is vital. The consequences of an improper claim can be severe, including repayment of the credit with interest and potential penalties. This could significantly impact your salon's financial health. If you have any doubts about the validity of an ERC claim you've filed, consult with a reputable tax professional who is well-versed in ERC immediately.

Disallowance Letters and Audits

It's crucial to note that alongside processing legitimate claims, the IRS is also intensifying its scrutiny of ERC claims. The agency recently sent 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect. If you receive such a letter, it's important to understand that this is a serious matter and you must act quickly. These letters typically provide a timeframe for response, and failing to respond within this period could result in a loss of appeal rights. If you're unsure about how to respond, seek professional advice immediately.

Furthermore, the IRS has indicated that thousands of ERC audits are underway. If your salon is selected for an audit, it's essential to immediately seek professional assistance from a tax professional who is well-versed in ERC. An experienced tax attorney can help you navigate the audit process, protect your rights, and work towards the best possible outcome.

Looking Ahead

The ERC continues to be a complex and evolving issue for many salon owners. While the latest IRS announcements offer hope for faster processing of legitimate claims, they also underscore the ongoing scrutiny of the program.

As we move forward, the IRS is likely to continue providing updates and clarifications regarding the ERC. Salon owners should remain vigilant and stay informed about these updates and how they might affect their businesses.

Remember, while the potential benefits of the ERC can be significant, they should always be balanced against the risks of non-compliance. As with all tax matters, thorough documentation, professional advice, and a commitment to compliance are essential.

As always, when dealing with complex tax issues like the ERC, you should work with qualified tax professionals who can provide guidance tailored to your situation. With the right approach, salon owners can turn these ERC updates into opportunities to strengthen their businesses and plan for successful futures.

Need Help? 

If you've received a disallowance letter, are facing an ERC audit, or have concerns about an ERC claim you've filed, don't hesitate to seek professional help. At Azarvand Tax Law, we specialize in ERC-related issues and can provide the tax guidance you need. Contact us at Info@AzarvandTaxLaw.com for a consultation. For more information about ERC audits and how we can assist you, visit our dedicated website at ERCAuditTaxAttorneys.com.

Remember, it's always better to be proactive when it comes to complex tax credits like the ERC. A qualified tax attorney can help you understand your rights, obligations, and options, potentially saving you significant stress and financial consequences in the long run.